Consider the following basket of goods, priced in U.S. dollars and Japanese Yens respectively. Suppose the following table represents the typical consumption basket of a U.S. or a Japanese citizen.

QuantityP ($)P ()

900 lbs. of Wheat:$ 2.95 2,125

130 lbs. of Rice:$1.78 1,945

200 gallons of Unleaded

Gasoline:$ 5.14 8,275

1 VCR Recorder:$ 85.25 4,985

1 LED TV:$ 675.50 18,500

200 Cans of Soda$4.75 4,100

20 Cheeseburgers: $ 6.75 1,500

a.If these market baskets are truly representative, then find the equilibrium random exchange rate ($/) using the Absolute Purchasing Power Parity Theorem.

b.Use the bundle of Rice and prove the Law of One Price.

c.Use the bundle of Soda and prove the Law of one Price.

d.Do we have deviations from the Law of one Price for those two bundles respectively?

e.State and discuss the APPP condition.

f.State and discuss the Law of One Price.

g.In this example do you observe any violations of the Homogeneity and Taxation Conditions? Carefully explain your answer.

h.What are the Laspeyer's Indices?